The Case

In the competition's xACT mergers and acquisitions case, the CFO of the fictional Lave company wrote, in part, to a PwC partner:

“We've been looking at Whole Earth Naturals as a potential acquisition target. I'm hoping you can help us out with a preliminary evaluation. Whole Earth has been around for awhile and has a solid reputation. Because they are privately held, though, it's been difficult to get a handle on them.

“I'd appreciate it if you and your team could do the research and make a preliminary recommendation. Specifically, I'd like to know:

What financial and/or operational risks you see within Whole Earth Naturals, and

Whether or not you would recommend our pursuing the acquisition.”

To buy or build? Should the company expand into a new product line by purchasing another company or by developing internally?

That was the merger and acquisition question posed in this year’s PricewaterhouseCoopers xTREME Games, a nationwide tax and accounting campus competition. For the first time, seven teams from Ithaca College participated.

In its presentation to a three-judge panel, the winning IC team recommended the fictional global consumer products company Lave enter the “naturals” marketplace by buying the fictional Whole Earth Naturals.

“We used our investigative and creative skills when making this decision,” said team member Rebecca Hudson ’13, an accounting major. “We learned that decision-making within a team requires extensive collaboration and cooperation among group members.”

“I learned what an M&A case would look like at PwC and received some real-life skills by completing a competition that resembles a real company's day-to-day tasks. It was a refreshing change from classroom examples,” said Daniel Sottosanti ’14, a business administration major.

The winning team receives $1,000 and consideration for the national finals, for which PwC will select five teams after reviewing videotapes of all the winning campus presentations. The competition, begun in 2002, attracted more than 900 teams from 84 colleges and universities in 2010.

PwC requires that each five-member team include a sophomore and a junior and at least three accounting majors. Accounting professor John McKinley, the event’s local advisor, selected the members for each IC team.

IC’s winning team also included Alex Denner ’12, a double major in accounting and business administration; Davin Huang ’12, an accounting major; and Nicole Hakimi ’13, an integrated marketing communications and writing major in the Park School of Communications with a minor in finance.

“Our team worked well together because we come from a variety of academic backgrounds,” said Hakimi.

Huang concurred: “When we were working on the case, non-accounting majors discussed possible solutions that I would have never thought about. It's exactly what the real world is going to be like, working with people from different backgrounds.”

Teams were given two weeks to prepare their presentations, which were delivered in closed sessions one evening in late October. Presentations were limited to 12 minutes, with each team member having to speak for at least one minute.

PwC partners put together each year’s case. This case contained an eight-page document, beginning with a cover letter from the CFO of Lave, a publicly traded company, to a PwC partner. The company wanted a recommendation on how to expand into the naturals marketplace, either by acquiring the privately held Whole Earth Naturals or building its own business. Seven pages followed with descriptions and financial data on the two companies.

The team weighed the financial and operational risks for Lave.

Whole Earth Naturals was well established, with a strong supply chain, strong resources and a strong brand name. But inventory had built up and collection of receivables was slow, resulting in cash-flow problems. It had negative working capital and a large long-term debt. A recent hurricane in India might mean replacing one of its suppliers.

The team used calculations such as EBITDA (earnings before interest, taxes, depreciation and amortization), NBV (net book value) and the receivables/turnover ratio to conclude that Lave should purchase Whole Earth Naturals.

“We discovered that upon acquiring WEN, the client could improve some of WEN's financial ratios with simple supply chain integration. We also realized that by selling WEN's receivables, we could reduce our initial investment and even pay off some of WEN's debt,” said Hakimi, active in the IC Women in Business Network and founder of a new group, Students Consulting for Nonprofit Organizations.

The team concluded that Lave’s return on capital from a purchase would exceed the cost of building its own brand, estimated at at least $500 million, said Hudson.

“We figured that we (Lave) could come in and use our superior management to help transform the company into a much more efficient company,” Denner said. “Also we figured we can underpay for this company because of their financial difficulties, thus acquiring essentially a good business for quite less.”

Using net present value analysis, Denner created a model to show favorable future cash flows for Lave. Hudson, who has studied mergers and acquisitions, evaluated other benefits of the acquisition. Sottosanti researched the area of India where Whole Earth Naturals had opened its newest manufacturing facility.

PwC says it created the xTREME Games to develop students’ skills in critical thinking, presentation, teamwork and time management.

“Not only does it allow students to work on a real-life accounting project, but it allows us to see students at an earlier stage in their college career. The students will get to learn more about PwC, and we, hopefully, get them in our pipeline for internships earlier,” said Laura Sobocienski, PwC campus recruiter for Ithaca.

Huang will intern next summer for PwC’s industry services group, then study for an MBA in accounting at Ithaca. Denner also plans on a graduate degree in accounting at Ithaca. Sottosanti will intern next summer for Mariner Investment Group in New York City.

Hudson says she’s aiming for an internship with PwC.

“This event has sparked my interest, and I plan to take additional finance courses that I previously was not interested in,” she said.